Comment: Light touch regulation is not a cake walk

Sharmon Ingraham, pictured, senior associate, Higgs & Johnson discusses regulation and how a lighter touch approach to certain products only works if it is also backed by the underpinning of the best international standards

The suite of products offered in The Bahamas financial services industry includes Private Trust Companies (PTCs), private foundations and executive entities. In the jurisdiction these products are also subject to light regulatory controls.

However, the fact that these products may be lightly regulated should not be equated with lax or no supervision. The Bahamas is committed to maintaining best practice within a well-regulated financial services industry. In that context, the industry focuses on ensuring that the products offered, while meeting the needs of those using such products, adhere to best practice and are properly regulated.

Notwithstanding the reduced regulatory requirements in respect of PTCs, private foundations and executive entities, there are regulatory mechanisms and controls implemented to ensure such vehicles are compliant under Bahamian law and best international standards in the industry.   

Private Trust Companies (PTCs)
Enabled via a 2006 amendment to the Banks and Trust Companies Regulation Act, (Chapter 316, Statute Law of The Bahamas) and specific subsidiary legislation, PTCs are designed to reduce red tape and to be lightly regulated. PTCs may be companies, limited by shares or guarantee, incorporated under the Companies Act, Chapter 308, or the International Business Companies Act, Chapter 309.

In keeping with its reduced regulatory profile, PTCs are required to have a minimum share capital of $5,000 and are assessed reduced licence fees in comparison with institutional trust companies. PTCs are exempt from the requirement to have the transfer of its shares pre-approved by the Central Bank of The Bahamas (the "Central Bank") as is required of licensed banks and trust companies.

Trust licence
PTCs are also exempt from certain other regulatory requirements including obtaining a trust licence from the Central Bank.   However, the legislation requires PTCs to have a Registered Representative and a Special Director as mechanisms in the administration, oversight and monitoring of such entities.

The Registered Representative is a valuable link in the regulatory scheme over PTCs, while the position of Special Director is directed at the due administration of the PTC. Registered Representatives are required to be in the jurisdiction and either a licensee of the Central Bank or a duly registered financial and corporate services provider approved by the Central Bank to act as a Registered Representative.

To qualify as a Registered Representative an entity is also required to maintain a minimum share capital of $50,000.00. The legislation also sets minimum criteria for a Special Director of a PTC. Specifically, Special Directors are required to possess no less than five years' experience in a discipline relevant to the administration of trusts.

Such disciplines include law, finance, commerce, investment management and accountancy; specialties necessary in the proper administration of trust structures.   

In the PTC regulatory regime Registered Representatives are the primary contact between the Central Bank and the PTC. Accordingly, the Registered Representative is expected to have certain information and documentation on the PTC.

Due diligence
The information required to be maintained by the Registered Representative include client due diligence documentation (retained for designated persons, settlors, vested beneficiaries and protectors among others), documentary support that the entity meets the statutory requirements to be a PTC, documentation establishing the PTC including memoranda and articles of association, trust and designating instruments and curriculum vitae for each Special Director.

The Registered Representative is also required to maintain the share register, annual compliance certificates, declarations on maintenance of accounting records, certificates of good standing and current client due diligence records.

The Registered Representative must also make an annual certification that the PTC continues to meet the statutory requirements. Consequently, the Central Bank may request of the Registered Representative documents and information on each PTC it is affiliated with, as well as issue directives governing the PTC and the Registered Representative and undertake onsite inspections.

To the extent there is any contravention of the requirements and directives of the Central Bank, or the Central Bank considers that the business of the PTC is being conducted in a manner detrimental to The Bahamas sanctions may be levied against the PTC and its Registered Representative.   

Private Foundations
Private foundations were included in The Bahamas' financial services tool kit by the 2004 enactment of the Foundations Act, Chapter 369D. In accordance with the provisions of the Foundations Act a Bahamian private foundation is an entity with separate personality, resident and domiciled in the jurisdiction. Such entity is required to be duly registered with the Foundations Registry.   

The Foundations Act also requires private foundations established under the legislation to have a foundation agent or a secretary with responsibility for certain statutory duties under the legislation.

A foundation agent is required to be a duly licensed financial and corporate services provider or a trust company licensed under the Bank and Trust Companies Regulation Act, Chapter 316, and not precluded from acting in such capacity under the Foundations Act.

Among the factors which may preclude an entity from acting as a foundation agent is the existence of a conflict of interest in respect of the founder or beneficiary of the foundation or arising from a personal relationship with a foundation council member.   

The Foundations Act
The Foundations Act requires the foundation agent to perform the statutory duties assigned to it under the Foundations Act as well as adhere to other duties which may be prescribed by any other written law. In this connection, the Foundations Act also establishes that the regulator which has oversight of a foundation's agent will have corresponding oversight of the foundation.

To this end, if the foundation agent is a licensee of the Central Bank, the foundation would be subject to the oversight of the Central Bank. The statutory duties imposed on the foundation agent by the Foundations Act include client due diligence in respect of the foundation.

The foundation agent is required to provide to the Registrar of Foundations a registration statement detailing certain prescribed particulars. The prescribed information includes the name, purpose or object, and duration of the foundation. The constitutional documents and amendments thereto of the foundation are also to be retained by the foundation agent.

The foundation agent is further required to provide registered office services to the foundation and to receive service of legal process or other notices on behalf of the foundation. The foundation agent is required to ensure the foundation is compliant with the legislation and provide a declaration thereof to the Foundations Registry.

The foundation agent is further tasked with the monitoring of changes in the prescribed information and amendments of the constitutional documents of the foundation and is obliged to notify the Foundations Registry accordingly.  

The foundation agent is subject to a statutory duty of care under the Foundations Act. The foundation agent is therefore required to act honestly and in good faith in the best interests of the foundation, exercising the care, diligence and skill of a reasonable person in comparable circumstances.    

Bahamas Executive Entities
Another component in the tool kit of financial services in The Bahamas is the Executive Entity. The Bahamas Executive Entity (the "BEE") was created by the Executive Entities Act, 2011.

The BEE is "a legal person established by Charter", for the purpose of performing executive functions in private wealth structures and has the capacity to sue and be sued in its own name. The Executive Entities Act defines "executive function" as:   

"(a) any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature including, but not limited to, the powers and duties of (i) an enforcer, protector, trustee, investment advisor and holder of any other office … of any trust; and (ii) the holder of any office … of any legal person; and

(b) the ownership, management and holding of … executive entity … and trust assets".   

The Executive Entities Act
The Executive Entities Act requires an executive entity agent to be appointed in respect of each BEE and, for the duration of the existence of the BEE, it is required to have an execute entity agent appointed. The executive entity agent must be a duly licensed financial and corporate services provider or a trust company licensed under the Bank and Trust Companies Regulation Act.

The executive entity agent must also consent in writing to its appointment to act as agent in respect of the BEE.   

The executive entity agent is required to undertake the statutory duties imposed upon it by the Executive Entities Act and any other regulatory duties imposed by relevant legislation.

The statutory duties imposed under the Executive Entities Act include ensuring the BEE is compliant with the legislation; undertaking necessary client due diligence, and ensuring proper documentation is maintained in respect of the BEE. Additionally, the executive entity agent also serves as the principal point of contact between regulators and the BEE.

Accordingly, the executive entity agent is the designated recipient for service of any notice or proceedings in respect of the BEE.   

The Executive Entities Act also imposes upon the executive entities agent statutory duty of care. The executive entities agent is therefore required to act honestly and in good faith in the best interests of the foundation, exercising the care, diligence and skill of a reasonably prudent person in comparable circumstances.    

Conclusion
The light touch regulatory control of the above type of organisations is effectively buffered by the presence of a regulated entity which provides services to the organisation.

The regulatory supervision of each of the above bodies intersect through either a licensee of the Central Bank or a licensed corporate and financial services provider, bodies who are themselves subject to regulatory oversight. In place of direct regulatory control by governmental authorities, PTCs, private foundations and BEEs are monitored and supervised by regulated agents of their choosing and not required to directly interface with the regulators.

This separation does not dilute the regulatory control over the bodies, however. Accordingly, well-managed Central Bank licensees or corporate and financial services providers will ensure that the all regulatory requirements when acting in the capacity as Registered Representative of a PTC, foundation agent of a private foundation or executive entity agent of a BEE are adhered to and its files are kept current, because their reputations are jeopardised by anything less.   

This article first appeared in the recent International Investment Bahamas Special Report 2020. To view the special report - released in association with The Bahamas Financial Services Board - click here.